caps a run of economic indicators that shows how wrong the RBA economic narrative has been.
RBA board members need to fall on their collective and figurative swords and admit it if they are to retrieve any credibility from this episode. Real interest rates have collapsed with the rise in inflation and are now completely at odds with the underlying economic fundamentals. But inflation is far from out of control, and the RBA should maintain the policy strategy for at least another six months.
We are not there yet. Wages in Australia remain stubbornly low according to the ABS. A central element of the RBA’s policy strategy is to get wages growth back up to a rate that is consistent with its 2 to 3 per cent inflation target. And keep it there. The rise in actual inflation over the past six months is making the RBA’s policy strategy increasingly difficult to execute.
The monetary policy strategy from here requires another six months of patience and then a quick and concerted monetary tightening once tight labour markets are generating higher wages.The next move in the cash rate shouldn’t be until later in the year, but it needs to be big, at least 40 basis points, if not 90. Get the cash rate to 1 per cent, let that flow around the economy and watch for a while.
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